Bond Market Update

Weak Jobs Report Sparks Rally

• U.S. Treasuries began August on a firmly higher note, sending yields toward their lows from the start of July. The trading day started with losses that were paced by the long end, but the entire complex charged higher in reaction to a disappointing jobs report for July (73,000; Briefing.com consensus 102,000), which was combined with a sharp downward revision to increases from June (to 14,000 from 147,000) and May (to 19,000 from 144,000). The post-NFP rally continued after the market received a disappointing ISM Manufacturing report for July (48.0%; Briefing.com consensus 49.5%; prior 49.0%). The weak combination led to renewed expectations for a rate cut in September with the fed funds futures market now seeing an 80.9% implied likelihood of a September cut, up from yesterday's 37.7%. Treasuries finished the day on their highs with yields on 2s and 10s stopping just a basis point above their respective lows from the start of July. Crude oil fell back below its 200-day moving average (68.11), trimming this week's gain to 3.4%, while the U.S. Dollar Index fell 0.9% to 99.07, narrowing this week's gain to 1.4%.
• Yield Check:
  • 2-yr: -25 bps to 3.70% (-22 bps this week)
  • 3-yr: -22 bps to 3.67% (-19 bps this week)
  • 5-yr: -19 bps to 3.77% (-18 bps this week)
  • 10-yr: -14 bps to 4.22% (-17 bps this week)
  • 30-yr: -8 bps to 4.81% (-12 bps this week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was lowered to 2.1% from 2.3% in the previous estimate.
  • Japan's Labor Ministry Council expects that the average minimum wage will increase by 6%.
  • President Trump sent letters to major drug manufacturers, requesting that they lower prices charged in the U.S.
  • China's July Caixin Manufacturing PMI hit 49.5 (expected 50.2; last 50.4).
  • Japan's July Manufacturing PMI hit 48.9 (expected 48.8; last 50.1). June jobs/applications ratio fell to 1.22 from 1.24 (expected 1.25) and June Unemployment Rate remained at 2.5%, as expected.
  • South Korea's July Manufacturing PMI hit 48.0 (last 48.7). July trade surplus reached $6.61 bln (expected surplus of $5.36 bln; last surplus of $9.08 bln) as imports grew 0.7% yr/yr (expected 2.0%; last 3.3%) and exports rose 5.9% yr/yr (expected 4.6%; last 4.3%).
  • India's July Manufacturing PMI hit 59.1 (expected 59.2; last 58.4).
  • Australia's July Manufacturing PMI hit 51.3 (last 51.6). Q2 PPI was up 0.7% qtr/qtr (expected 0.9%; last 0.9%), rising 3.4% yr/yr (last 3.7%). July Commodity Prices were down 9.0% yr/yr (last -8.7%).
  • New Zealand's June Building Consents were down 6.4% m/m (last 10.3%).
  • Eurozone's July Manufacturing PMI hit 49.8, as expected (last 49.5). July CPI was unchanged m/m (last 0.3%), rising 2.0% yr/yr (expected 1.9%; last 2.0%). July Core CPI was down 0.2% m/m (last 0.4%) but up 2.3% yr/yr, as expected (last 2.3%).
  • Germany's July Manufacturing PMI hit 49.1 (expected 49.2; last 49.2).
  • U.K.'s July Nationwide HPI was up 0.6% m/m (expected 0.5%; last -0.9%), rising 2.4% yr/yr (expected 2.1%; last 2.1%). July Manufacturing PMI hit 48.0 (expected 48.2; last 47.7).
  • France's July Manufacturing PMI hit 48.2 (expected 48.4; last 48.1).
  • Italy's July Manufacturing PMI hit 49.8 (expected 48.7; last 48.4). June Retail Sales were up 0.6% m/m (expected 0.3%; last -0.4%), rising 1.0% yr/yr (last 1.4%).
  • Spain's July Manufacturing PMI hit 51.9 (expected 51.7; last 51.4).
• Today's Data:
  • Nonfarm payrolls growth was weak in July and much weaker than thought in prior months, with employment in May and June combined 285,000 lower than previously reported. The unemployment rate was decent at 4.2%, but the U-6 unemployment rate, which accounts for underemployed workers, jumped to 7.9% from 7.7%, the labor force participation rate went down, and persons unemployed for 27 weeks or more increased to 24.9% of the unemployed from 23.3% in June. Average hourly earnings growth was decent at 0.3% and was up 3.9% year-over-year, versus 3.8% in June.
    • The key takeaway from the report is the soft nonfarm payrolls situation, as that will stoke concerns that the Fed is behind the curve, which in turn could stoke concerns that economic and earnings growth prospects are not as bright as currently envisaged. That could pose problems for a richly valued stock market, unless it trades through that noise and focuses on the notion that rate cuts are sure to follow.
  • The July ISM Manufacturing Index checked in at 48.0% for July (Briefing.com consensus: 49.5%), down one percentage point from the 49.0% reading for June. The dividing line between expansion and contraction is 50.0%, so the July figure suggests manufacturing activity contracted at a faster pace than the prior month.
    • The key takeaway from the report is that 79% of the sector's GDP contracted in July. That is up from 46% in June and suggests the manufacturing sector has not yet seen the benefits of onshoring in response to the tariff actions, which themselves have stoked a good bit of planning uncertainty per the observations of survey respondents.
  • Total construction spending decreased 0.4% month-over-month in June (Briefing.com consensus: 0.1%) following a downwardly revised 0.4% decline (from -0.3%) in May. Total private construction was down 0.5% month-over-month, while total public construction was up 0.1% month-over-month. On a year-over-year basis, total construction spending was down 2.9%.
    • The key takeaway from the report is the same as the prior month: a downturn in new single-family construction, which is being pressured by higher costs, was the driver behind the weakness in residential spending.
  • The final University of Michigan Consumer Sentiment Index for July dipped to 61.7 (Briefing.com consensus: 61.8) from the preliminary reading of 61.8. The final reading for June was 60.7. In the same period a year ago, the index stood at 66.4.
    • The key takeaway from the report is that consumer sentiment, while not strong, has improved in recent months along with inflation expectations.
  • The S&P Global U.S. Manufacturing PMI hit 49.8 in the final reading for July, up from 49.5 in the flash reading, but down from June's final reading of 52.9.
• Commodities:
  • WTI crude: -2.8% to $67.35/bbl
  • Gold: +1.5% to $3399.60/ozt
  • Copper: +1.6% to $4.43/lb
• Currencies:
  • EUR/USD: +1.0% to 1.1535
  • GBP/USD: +0.3% to 1.3233
  • USD/CNH: -0.1% to 7.1988
  • USD/JPY: -2.0% to 147.75
• The Week Ahead:
  • Monday: June Factory Orders (Briefing.com consensus -5.1%; prior 8.2%) at 10:00 ET
  • Tuesday: June Trade Balance (Briefing.com consensus -$62.0 bln; prior -$71.5 bln) at 8:30 ET; final July S&P Global U.S. Services PMI (prior 52.9) at 9:45 ET; July ISM Services (Briefing.com consensus 51.5%; prior 50.8%) at 10:00 ET; and $58 bln 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -3.8%) at 7:00 ET; weekly crude oil inventories (prior +7.70 mln) at 10:30 ET; and $42 bln 10-yr Treasury note auction results at 13:00 ET
  • Thursday: Preliminary Q2 Unit Labor Costs (Briefing.com consensus 1.5%; prior 6.6%), preliminary Q2 Productivity (Briefing.com consensus 2.2%; prior -1.5%), weekly Initial Claims (Briefing.com consensus 220,000; prior 218,000), and Continuing Claims (prior 1.946 mln) at 8:30 ET; June Wholesale Inventories (Briefing.com consensus 0.2%; prior -0.3%) at 10:00 ET; weekly natural gas inventories (prior +48 bcf) at 10:30 ET; $25 bln 30-yr Treasury bond auction results at 13:00 ET; and June Consumer Credit (Briefing.com consensus $8.6 bln; prior $5.1 bln) at 15:00 ET
  • Friday: Nothing of note